"Contribution Margin and Breakeven Analysis" Simulation

Essay by lcdavenport November 2006

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Aunt Connie's Cookies is a brand that makes lemon and real mint cookies through the country. Maria Vilianueva, the grandniece of the owner, is now the CEO of the family-owned business. In this simulation, Ms. Vilianueva appoints me as the COO. My job is to make the decisions with an outcome to maximize the firm's contribution margin and operating profits.

Aunt Connie's Cookies was approached to produce a bulk order of one million packs of real mint cookies to be completed in one month's time. The company needed to decide if completing this order will be a good option. Maria suggested that we increase our ad expenses by half for both the cookies. She stated that we need to reach out to more retailers in the metro areas and pay more to our distributors. I believe that Maria's suggestion should not be followed because in order to maximize the operating product, it is better to produce more of the lemon cookies because it has a greater contribution margin per unit than the real mint.

This meant that the current production of real mint cookies should be reduced.

The bulk order should not be considered when the cookie production for both types of cookies exceeds production capacity. This would mean that the company is incapable of completing the order. Also, Aunt Connie's Cookies should not consider accepting a bulk order if the asking sales price per unit for the order is at a price that would produce results where the contribution margin is less than the fixed costs. Therefore, it would not be worth it to the company to fulfill the order.

The breakeven point for manufacturing lemon cookies in the new plant is 563,000 packs. The decision to manufacture 600,000 packs resulted in operating profits from the new unit, which...